Is there a 403b loan?
If you are planning for a big purchase and you don’t have enough money to cover the cost, you may consider taking a 403(b) loan. Find out what a 403(b) loan is and how it works.
A 403(b) plan is a retirement plan designed for employees of public schools, non-profit organizations, and other tax-exempt organizations. If you have a big purchase coming up, you may consider borrowing against your 403(b) retirement savings. But, is there a 403(b) loan?
A 403(b) retirement plan allows participants to borrow against their retirement savings, and pay back the money over time. You can take a 403(b) loan to buy a home, pay for college education, or pay other expenses. Unlike an early 403(b) withdrawal, the IRS does not impose early withdrawal penalties on the 403(b) loan.
What is a 403(b) plan?
A 403(b) plan is a tax-sheltered plan that is offered to employees of public schools, churches, hospitals, non-profits, and other tax-exempt organizations. It is similar to the 401(k) plan offered by private-sector employers to their employees, and they have similar annual contribution limits. For 2022, you can contribute up to $20,500 to the savings plan, and an extra $6,500 if you are 50 or older.
A 403(b) plan is funded through payroll deductions, and the employer withholds these contributions before taxes. This means employees make pre-tax contributions to the plan, and they only pay taxes when they withdraw money, usually in retirement. An employer may also offer a match, with some employers matching as much as 50 cents for every $1 employees contribute.
If your employer offers both 401(k) and 403(b), you may be required to pick one of the two retirement plans or contribute to both plans. Since these plans have separate contribution limits, you can max out your contributions for each plan.
How a 403(b) loan works
When you take a 403(b) loan, you are essentially withdrawing a portion of your retirement savings with the intention of paying back the money over time. Unlike a traditional loan, there are no credit checks involved, and the loan terms can be more favorable compared to a personal loan or credit card loan.
Typically, each 403(b) plan has different terms for its loan, and you should find out the loan terms with your plan administrator. The 403(b) loan must be repaid in equal installments at least quarterly or more frequently. The loan repayment period is usually five years, but it can be longer if you are borrowing to buy a house.
If you leave your employer and you have an outstanding 403(b) balance, you will be required to pay the full balance at once. Since you are no longer an employee of the company, you cannot pay the loan balance through payroll deductions; instead, you will be required to make a direct deposit to the 403(b) plan. If you are unable to pay the remaining balance, the IRS will consider the unpaid loan amount a distribution, and you may be subject to income taxes and a 10% penalty for early withdrawals.
How much can you borrow from 403(b)?
The IRS limits the amount you can borrow from your 403(b) plan. You can borrow 50% of your vested balance or up to $50,000, whichever is lesser. If your 403(b) balance is less than $10,000, you can borrow 100% of your balance. The IRS allows individual plans to enforce stricter terms for their loans.
Once you receive the loan, you must start making loan payments at least quarterly, or more frequently. You must make enough loan payments through payroll deductions to meet the terms of the loan. In some cases, some employers may allow a short grace period after the loan is disbursed before you can start making loan payments.
If you have surplus cash, and you want to pay off the 403(b) loan early, your plan may allow you to make a lump sum payment to clear the unpaid balance.
How much interest do you pay on a 403(b) loan?
The interest rate you pay on a 403(b) loan is the prime rate plus 1%, which is a reasonable interest rate compared to the interest charged on traditional loans. For example, if the prime rate is 4.5%, you should expect to pay an interest rate of 5.5% on a 403(b) loan.
Should you take a 403(b) loan?
Although it is easier and cheaper to take a 403(b) loan than a traditional bank loan, you should weigh the consequences of the plan loan before you tap into your 403(b) retirement savings.
If you take a 403(b) loan, you will pay back the interest with post-tax money, and you will pay taxes again when you take a distribution. This means you will pay taxes twice on the same amount.
Additionally, by borrowing from your 403(b), you will lose out on the potential investment returns you could have earned in the same period. You can compare the 403(b) interest rate against the returns you could have earned to know how much you will earn or lose.
On the other hand, if you have exhausted your emergency fund, and you have no other source of income, you can take a 403(b) loan to meet your immediate needs. Borrowing against your 403(b) savings can help you avoid high-interest debts like personal loans and credit card debt.
If you are no longer with your employer, you won’t be allowed to take a 403(b) loan from the account. However, we can help you borrow from your old 403(b) plan by rolling over your 403(b) to Beagle. Beagle unlock your old 403(b) money, and you can borrow at 0% net interest.